The ownership premium

There's also income/price ratios which have also gotten completely out of whack, due in part to the credit bubble that's been inflated over the past 8-10 years. Any way that you measure it, there is going to be a lot more pain before this is all over.

And BTW, the fact that you reference and link to Calculated Risk, just raised your standing in my mind ten fold. That is a very good blog on finance.

$129,000 Overvalued Compared To The Historic Long Term Trend Line....

Yup, Everything Is Fine People. No need for you First Time Homebuyers to be worried about buying your first place, just buy that 3 bed 1 bath ranch for $370,000.

It will be fine....

yep, that's what Marcus and I and others have been saying for months. The amount of resistance to it is fascinating - goes along with the stock market to show we are still in a bull phase and haven't reached capitulation. Prices won't stabilize until after capitulation of course.

As one of my law school professors once said, home ownership is best thought of as a bundle, or basket, of rights. Looking at those rights financially, it can be thought of as breaking into 3 fundamental components.

-The right to occupy (ie rent value of the equivalent space)
-The right to modify (much easier to put holes in walls if you own it)
-The right to future appreciation.

The right to future appreciation can be roughly valued, like any option. Sort of a modified black-shiller-sholes without the hard data.

Currently future appreciation is valued at a prices that implies enormous future price rises. While true of the last 8 years, tough to find anyone thoughtful who would predict we will see that going forward.

To take a concrete example, lets look at a theoretically representative One Bed South End Condo. I'm going to make a few assumptions here as I don't want to spend my afternoon on this, but I'd welcome anyone using a real example.

Assume $400k price, $6k annual Property Tax, $6k annual condo fee including structural property insurance - contents insurance is a wash with rent.

Assuming no down payment (to make math easier, it still makes the numbers work, please nobody post something that makes it clear you've never heard of opportunity cost) that apartment will cost $2334 mortgage + $500 property tax + $500 condo fee a month for a total cost of $3,334 a month.

Monthly rent on the apartment will be around $2100 a month. So around $1200 a month, or $14,500 a year is the price paid for future appreciation (and right to paint the walls)

The math is actually more complicated, but under these circumstances you have to think that the property will increase in value by at least $15k a year to justify that ownership premium. (I welcome anyone to check my math etc - its rushed and back of the envelope, but I trust the results will be directionally the same)

Its tough to find any serious observer who thinks that housing is going to appreciate at that rate. Basically, it requires housing to take off like a rocket again. Not going to happen, bubbles don't reoccur in the same market, tulips are still cheap.

And that is absurd.

Some people are under the impression that buying is always better than renting. Usually the people saying this focus on (a) rent is an expense, and (b) there are tax advantages to owning. What they neglect is that there are huges expenses with owning, including propetry taxes, repairs, and the interest on the mortgage. Sure you get some of it back in tax savings, but not all of it. So expense-wise you would have to calculate the rent expense vs. home expense to see which is better.

And owning solely as an investment strategy is not very sound. You are essentially speculating that an investment in your one property is going to outperform any other investment you could make (including buying REITs which spread real estate risk over many properties).

I am a home-buyer-in-waiting, and will probably jump into the market next year because renting makes too much sense from my financial situation at the moment.

Buying versus renting is also a 'quality of life' issue. Most rental apartments are not kept up and not modernized, the reason I bought a condo versus renting an apartment was that I wanted a much nicer place. You just can't find the same properties in the rental market that you can for purchase. I pay a mere $300 more per month to own my condo versus the person who rents a similar unit from another owner in my building. You just have to find the right deal, if you do owning is MUCH better.

a 3-4% appreciation is not out of the question for the south end, particularly over a 3-5 year term. thats all it would take in year one to offset costs, 1% less the second year, then a negligable amount the 3rd.

Regarding opportunity cost, or as alex states the speculation that you couldnt earn more on your money elsewhere...please dont forget you are inesting someone elses money and the 3-5% appreciation on 4ooK may still be better than 8-10% on whatever $$$ you have to invest (if you had a 10% downpayment only 40K)....

Matt - your $15K / year appreciation - not counting any "right to modify" of this $400k home - is 3.75% appreciation per year. ONLY 3.75% per year...
Are you SURE that's an unrealistic expectation over the LONG term? Sure - 10% is out - that's $40K per year. And maybe you could do better if you took that $15K / year in the stock market. Or Gold. Or F/X Arbitrage, or Options on the price of peanuts. Who knows - which will be good or not and in the meantime I AM getting those other benefits - including tax breaks and equity.
Certainly not a bad investment at the example you went with...

There's an interesting tension between the increasingly compelling pro-rental arguments and the evidence that renters may be the segment most impacted (displaced) by the current melt-down. I would suggest that the right to occupy consists of several sub-baskets beyond equivalent rental value.

I appreciate charles' analysis re: rental savings, and am curious about the impact of other financial elements such as mortgage interest deduction (vs. rental), "free" insurance/legal protections via Homestead exemption and savings attached to not using taxable income on housing costs in retirement, i.e. house is paid off.

to respond to charles, from a real life perspective, I am a current in-process-of-buying 20-something and I was under the assumption that paying my own mortgage rather than someone elses, would be financially smart in the long run.

My fenway-area studio is $200K with a mortgage of $1,150, condo fees of $180 and Real Estate taxes of about $200. Figuring that the person renting out the place before I got it was renting it for $1,100, I am estimating that I'm paying an extra $400 per month to own the place. (Although with the inflating rental costs that i've seen, it might be more realistic to expect a $1,200 rental rate for this coming september) This estimate comes out to about $4,700 per year in appreciation or 2.5% per year. In my opinion, even if the market goes a bit south, it would be surprising to me to not make up that percentage over the next 5 years when I plan on selling the place.

Charles, you forgot to include two things in your calculation: the tax deductions for mortgage interest / property taxes, and the fact that the mortgage portion of the payment is locked in for life while rents will continue to go up with inflation.

Including the tax deductions (and assuming 10% of the mortgage goes to principle at first and a 28% tax bracket), the cost of the condo goes down to $2606 per month.

If rent would go up by 2% a year, then over ten years that's an extra $24,000, which works out to an average of $2,400 a year or $200 a month. Now the condo cost is down to $2406 a month, while rent is $2100 a month.

Including those two factors makes the condo cost $3,600 a year more than renting, a big difference from the $15,000 a year that you got.

There are more variables you can look at as well. Having a landlord you can call whenever you have a plumbing problem is worth a certain amount of money. The realtor fee when you sell your condo will cost money. General upkeep like re-painting or re-finishing the floors will be paid for by the owners insetad of the by the landlord or insurance.

All of these numbers stated sound fine and are probably accurate but in the bigger picture, I think owning is almost always better then renting. In my mind, the caveats mostly come down to each person's current scenario: how well within your means you are willing to live, what your marital status is, if you have children, your market timing, the downpayment, etc..

I bought a condo and lived in it in downtown Boston from 2001-2006, roughly during the heights of the real estate boom. Towards the end of that time I got married and had to move to another city for 3 years for my wife's medical training. We rented it until now. We are finalizing its sale in June so we have the proceeds to buy a place when we move back for good in 12 months. Buying instead of renting was arguably the best decision I have ever made. It has made me wealthier, I will not be taxed at all on any of the proceeds except for the city stamp tax on its value (pretty minimal), and it will enable my wife and I to buy a place soon that we would not be able to afford without the proceeds for several more years (we are done moving around).

One example, right or wrong, I always thought of renting as throwing your money away. Besides allowing you to live in someone else's place, it doesn't enable you in any other way. While the bank mostly owns your home, you write off the interest and property taxes, and at least some of it goes towards the principal so you build equity.

There are stupid ways and smart ways to buy a place, no doubt about it, but adding up all the advantages and factoring in the disadvantages versus renting, to me it is an easy call.

I can only speak for myself..

In 1999 I bought a home for $300K.
Mortgage for $230K
Took a 15 year loan at fixed 4.75%
Mortgage payment is $1780/month
$5,000 a year in property taxes.
$1,000 a year in insurance.

Guess what? In 6 years my mortgage is done.
Oh..and the houses are still selling for $600K in my neighborhood.

Where will I be in 6 years? 100% equity.
Where would I be if I rented all this time?

Taxes on a 400K apt in the South End are actually probably less than $3,000 with the residential exemption - not $6,000. Also, condo fees for the vast majority of $400K condos are not even close to $500 a month. They are probably around 200 or 300 depending on what is included (heat, gas...). So the original cost estimate is off by around 5 or 6 thousand a year, meaning the cost of ownership is about $500 less a month than the original estimate of $1,200. Therefore, the cost of ownership is about $700 a month (This does not include the mortgage deduction which would reduce this several hundred a month). So, the condo needs to increase in value by only $8,400 a year to break even over the long term. That is about 2% the first year. And in the future years, rent goes up...

The really interesting thing is to look at it from a landlord's perspective. It is now a money losing business. At the stated historic ratio of 5% (which seems low to me), it is a money loser the first year of ownership. The only way to make money is with rent inflation and capital gains. At 3.5%, the proposition is just ridiculous.

If you run the numbers, the only way to make money at that ratio is for large gains every year in rent and prices, continuing for five or ten years without a break. Rents have been about flat for the last eight years around Boston, and I don't know anybody who is predicting large, steady gains, starting now and continuing into the indefinite future.

As for those who bought at lower prices years ago and are renting their places, they would be better off selling and investing their equity in T-bonds.

I can't even imagine what the landlords are thinking and why they haven't been bailing out en masse.

Dolo - I left that out and maintenance for simplicities sake.

Katie - assuming you will make 4% a year on an apt. in real terms is phenomenally higher than historic returns. Everyone seems to have forgotten this despite it being easily googlable.

I'm aware that there was money to be made in real estate recently. I made quite a bit until I sold out in 2005. I would have made less if I kept all of it till now, but still would have made money. I'm not interested in making less money, so I sold when it was obvious the market would crash.

I used to own a number of south end rental apartments. I made no money on rent, all the money was on appreciation.

I'll buy real estate again. I just wouldn't buy it now, as there is still no money to be made if you look at the math.

Summer 2009 I will probably start looking. I expect prices to drop at least another 10% by then.

I just want to make a couple of points to Charles who posted a well thought out and interesting comment above. He states that the difference in cost between renting and buying that hypothetical one-bedroom at about $1200/mo or $15K/year. I won't get into the tax benefit which others have already mentioned.

If you take that $15K a year extra that you are paying for the condo and assume you hold it for the entire length of the mortgage, two things happen: first, rents go up through inflation alone. The mortgage amount (excluding taxes, condo fee, etc) is fixed (assuming you got a fixed-rate mortgage). So the $1,200/month gap will eventually shrink if not disappear completely. And second - if you're holding that 30 year mortgage through the entirety of the term (may not be realistic, but who knows?) you will eventually own the condo outright. So take that $15K per year difference and multiply that out over the 30 year term = $450K. IF you were to hold the condo to term and you can't sell that sucker for at least $450K, then there is something seriously wrong with your ability to pick properties.

Of course, the present value of that $15K is worth a heck of a lot more than the future money on a dollar for dollar basis, but assuming SOME appreciation, you should do pretty well at the sale.

Just a couple of factors that I thought were overlooked in an otherwise interesting comment.

" 3.75% appreciation per year. ONLY 3.75% per year"

"a 3-4% appreciation is not out of the question for the south end, particularly over a 3-5 year term. thats all it would take in year one to offset costs, 1% less the second year, then a negligable amount the 3rd. "

hello??

A 3-4% DEPRECIATION is not only "not out of the question" it's very likely. Factor that in to your rosy equation....

yeah, I agree with all that of course - the discounted present value is an issue that I didn't want to get into.

Basically you can treat the ownership premium as the cost of an option, make some volatility assumptions, and get the value of that option from black sholes. You can then compare the value of that option to what you are paying.

But to make clear, I just was doing back of the envelope - this blog isn't getting that much of my time. Tax was left out, as was maintenance, as was oppty cost, as was some other stuff.

I do believe for most people owning is the right thing to do actually - some above are implicitly assuming that I don't favore home ownership at all. I'm actually hugely in favor of it.

It must also be said that for me real rates of return are far more important than nominal rates....

I just thinking buying now when all the numbers show the price will drop is a silly thing to do. A lot of people don't realize how unusual the last 8 years were, and think they will repeat, for no reason but hope that I can figure out.

Hey all ... great (and civil!) dialogue ... thought I'd post a link to this calculator on NYTimes.com ... allows you to compare the cost of owning (over 30 years) as opposed to renting ... would be interested to hear critique of the tool, such as whether folks feel that it accurately captures all the factors at play.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

Gus,
You make a very interesting point about rent and landlords. I would venture to say that anyone who bought a place at the peak of the market and expected to rent it out at a profit, or even just breakieven, was smoking crack. But many landlords bought their properties when the prices were low. For example, I bought a two family hosue in Somerville in 1996. I steadily increased rents (only increased them when I had a new renter come in, which happened once every 2-3 years, so I got no complaints). By the time I sold the property in early 2005, my renter was paying 80% of my mortgage, and that was even after I refinanced and added debt for improvements. Disregarding the fact that I had the good fortune to ride that huge equity increase wave that tripled the value of the house in 9 years, it was still a good deal for me. Counting the renter's contribution to my income, it amounted to me being able to rent an 800 square foot 2 BR apartment in Davis Square for $600/month (at the beginning of my ownership) and only $300/month at the end. When you account for tax benefits of being able to write off interest, property taxes, half of all maintenance and repair expenses, and the best deduction of all for landlords, DEPRECIATION, I was basically living there for free. Can that happen again? Not unless there is quite a bit more downturn in prices and steady gains in rents. But if you're going to buy I think the owner occupied multi-family is the way to go.

CW - thats a major issue to my mind. Like you, I used to make money being a landlord. By 2002 or so I wasn't making much, but the appreciation was great.

On a cash flow basis, small scale landlording in Mass has gotten pretty tough if you are actually trying to make money and are aware of the opportunity cost.

This is a bad sign for prices, and backs up the graph Binyamin posted.

I hate renting. I love owning my home.

That said, owning is not for everybody.

Guys, there is no right and wrong here. Its all a matter of preference. Nobody should be judged based on their preference. There are pros and cons, and who you are and what you are like factors in.

All said, I too think many homes in our Boston region are still overpriced. However, we are seeing more instances of propertly maintained homes selling for a fair price. Sales volume is increasing. Home condition is today more of a factor than in the past few years. Its nice to see that homeowners who keep up with their maintenance are getting the reward they deserve.

Danny,

Sean, there are many buy vs rent calculators out there. This is a nice one since it has the graph. It shows what many of us knew during the bubble, from a financial perspective it was much better to rent than own.

The fact is, a home should be viewed as a roof over your head and nothing more. The historical appreciation rate of homes has been about 0.8% above the inflation rate (based on Case/Shiller) going back to the late 1800's, so at best a home is an inflation hedge. Anyone who says that a home which you live in is a good investment, knows very little about investing.

I'm looking to buy a condo after renting for the past 3 years. My rule of thumb is that if I can't rent the place out and at least cover my costs (mortgage, taxes, insurance and condo fee), then it's overpriced. Not a very scientific measure, I realize, but it gives me the peace of mind that if I had to move, I wouldn't have to sell and take a loss.

A factor that I think most people generally have ignored has been the ability to take up to $250K per person in tax-free capital gains if you sell a home you have owned and lived in for two years or more.

Frankly, I suspect (but do not know) that this has played a major role in the major dislocations and price escalations in the South End over the past decade or so. This is an unintended consequence of the change in the law that previously allowed a one-time exclusion, limited to people age 55+.

Realistically, except for the need to live -somewhere,- it makes no economic sense to buy a home with the plan to actually live there when you can buy, sell, take some of the tax-free profit off the table, and buy again, repeating the process every few years, like a giant Ponzi scheme working on the "bigger fool" theory.
s

Binyamin gave a link to a great tool to explain to the 1st time home owner how owning is not necessarily the best option I'm a retired military member who moved 14 times in the 24 years I was in the Army and that chart could have come in handy with the first four homes I bought, knowing that I was not going to be there for long.

Ouch! Charles, you are really off on your estimates!

Yikes.

I hope your other analyses have been more spot on.

I'm not saying it invalidates your points, just that people need to be a little more skeptical of what people write as comments because they may not have all the facts and figures right.

Yes, you can criticize me for my point of view, but save a little for the "know it alls" on this board.

John K, if you reread the thread a few more times, you may have better luck following the calculations.

On other matters:

I am much amused by the pretense that owners keep the same fixed mortgage payment for thirty years. What country have the authors of those comments been living in--and in what decade?

And perhaps it's time for someone to illustrate how the mortgage interest tax deduction actually works. Hint: It's not worth much after the first few years.

The putative value in renting over owning is vastly overstated by its proponents.

There are intangibles in renting that are very hard to measure in financial terms, as it were. How much is it worth to you to not have to run the risk of being saddled with a poor landlord, let alone a &%!! landlord (like the one my wife and I were recently suffered with )?

How much is it worth it to you to have to cede even minimal control over one's interior or exterior space, such that one always must ask permission to alter it in even the most minimal ways?

How much is it worth to you to almost always be inhabiting inferior property, because, with few exceptions, that is what most rental property is, inferior property. In fact, as one goes into the better neighborhoods and towns, it becomes very hard to find decent rental stock at reasonable prices?

The comment below exemplifies the stupefying mindset of those who advocate
renting over buying based on nothing more than monetary considerations.

"Realistically, except for the need to live -somewhere,- it makes no economic sense to buy a home with the plan to actually live there when you can buy, sell, take some of the tax-free profit off the table, and buy again, repeating the process every few years, like a giant Ponzi scheme working on the "bigger fool" theory."

Who wants to live in such a manner? It's absolute madness to council that individuals, let alone families, should go about their lives such that they are picking up and moving "every few years." I supppose if one enjoys "existing" (and I use that word advisedly) in a fashion such that one never really turns their house into a home, and has very little if any interest or attachment to even the idea of community, has no issue with the ghastly stress of putting a home on the market, looking for a new home, and, then actually packing up and moving over and over, then the above formulation makes sense.

My 40 years of home ownership experience has shown that those who always say their home was their best investment fail to factor in the TOTAL cost of ownership. Start with closing costs, interest costs over the term of the loan, earnings on the down payment that you didn't have to put down on the rental unit, and the big ones are the repair costs that average 1-1.5% per year (every year). Renting means you can move as your needs change without regard to the real estate market at that time (freedom). Another one is the yard equipment or pool equipment that you don't have to own and maintain. Taxes are minor as there are ways to minimize taxes on investments (ETF's). The main issue I have with ownership as an investment is that home prices don't rise or fall in a linear fashion. It may be a poor time to sell, or buy for that matter when it's your time to do so.. A house is a use asset. My two cents.

One argument that is repeatedly made is that "rent keeps going up" but has anyone who said that actually rented recently? I've lived in five different apartments in the past 10 years in four different towns, and the only time my rent has gone up has been when I've moved to a nicer place - I actually pay less for a 2BR now then I did in 1998. A 2BR in the TRIBECHMY* area has held pretty steady around $1200-1400 for the past decade.

Not to mention that if you are a good tenant and stay a while you may seldom see rent increases at all. The landlord wants the mortgage and taxes and expenses paid - just the taxes and expenses if the house is paid off - and if nothing catastrophic happens to him/her or the house your rent may never go up. I've never seen a rent increase. Friends have been renting for 10 years in the same house and have seen their rent go up only $100. It would be interesting to see what rent increases Former AG Tom Reilly has encountered in the Watertown apartment he's rented for four decades.

*TRIangle BEtween CHArles and MYstic - yes, I just made that up.

KB - to answer your question, yes my rent has been increased 3 times (at two different properties) in the last 5 years. The places were nice though, but I suspect properties on the lower end of the quality scale must keep rates low to keep tenants.

Renting vs buying is really a personal preference. For me, I was tired of living in the same building with 100 other people walking up 3 flights of stairs with groceries in hand and getting door dents in the parking lot. I was also tired of moving every couple years just to get a nicer place or cheaper rent. Paying the ownership premium was worth it in my mind. I really don't pay much attention to the ups and downs of the housing market anymore because I don't plan to move anytime soon.

John K, putting actual numbers behind your statements would be helpful. Having read my comments, what do you take issue with?

I note as an aside, that using analysis not dissimilar, though more detailed, I went heavily into real estate in 1996 and sold out in 2005. I'm saying this not to brag, but to point out I'm not just talking, I've actually put millions behind my predictions. And been right so far. (I also called oil 3 years ago, and the stock market crunch a year ago, and made a good deal of money on each). Unlike many here, I'm not just shoving my opinions out, I'm actually acting on what I say, which means I tend to take it seriously.

I rent in a luxury building. It's no different in comfort from the average condo. Rents have gone up minorly. I'd rather own, but living this way doesn't bother me in the least.

Losing money does bother me. I have an emotional attachment to owning, but the economics of a very sizable purchase matter more.I do recognize not everyone thinks this way, I find that bizarre, they find my attitude bizarre. So it goes...

Dave - maybe it's just the luck of the draw, then. Our properties haven't been at the lower end of the quality scale, and we did a lot of searching to find them. I look at apartment listings from time to time and this just seems to be the market rate for the suburbs of Boston. You may be right about landlords keeping rents steady to keep tenants. The people I know who have had steady rents are older, more stable, with steady jobs (i.e. not students) so landlords may want to keep them.

Another distinction may be managed building types of apartments versus apartments in multi-family houses with a single landlord. The former probably experience regular rent increases, but in this area I think most rental properties fall into the latter category.

Marcus, my comment was directed at the estimate that property taxes on a one-bedroom condo in the South End would run $6,000 per year and that condo fees would run $500 per month. Both are wildly inflated values. As a real estate agent with years of experience, I have a very good idea of what property taxes run for owners, and a very good idea of what average condo fees run for owners. And, as a condo owner, I know from first-hand experience. Property taxes might be $3,600, minus the resident exemption, bringing it down to $2,207.22 (to be exact). Condo fees in a typical five-story walk-up would be around $150-$250, per month.

As I said in my comment, this does not invalidate the argument.

My point was, if someone doesn't know enough about the costs of ownership, then how can you be sure all the other arguments and comments are accurate? The other commenter was boasting of how "spot-on" he had been in his analysis over the past year, and I called him out on it.

You guys should stick with simply copying and pasting data written by other people, it will leave you less open to criticism.

John,

If condo fees are that low, they probably don't include insurance. In which case you can add that in to get back up to $500. I was implicitly putting that in there. Granted I didn't spell it out, like I said it was back of the envelope. However I'd assume any reasonably competent realtor would realize that full ownership cost had to reflect PITI.

As I said, it was a made up example, and I welcomed anyone to put forward actual numbers.

So I welcome you to take an actual South End listing and put forward actual numbers, rather than assertions based on "I'm a condo owner". I'd be willing to bet I've owned a lot more south end condos than you have, so I can make the same sort of claim with the same sort of validity - ie none.

I clearly said I was making back of the envelope guesstimates and I wasn't going to spend the time to write up a full case.

Actually checking the Boston tax rate is $10.97 per thousand, or $4388 for 400k. You'd no doubt like to muddy the waters with a residential exemption. In which case you'll of course put in the annualized costs of assessments, water bills, landscaping, etc. What honest realtor wouldn't?

I find it interesting that you are quibbling about a $1-200 a month, not the reality of the ownership premium as reflected by the graph and the numbers.

Please feel free to post your own numbers rather than assertions.

MLS#: 70744766/$419,000
Taxes = $2,115 a year/$176 a month
Condo Fee= $238 a month including heat/water/gas/master insurance
That totals $414 a month. In the original formula you were estimating $1,000 a month for the condo fees/taxes. That is not an insignificant difference.

Danny,

I did an analysis of your situation using the stats you provided. As of May 1, 2008, if you you invested the down payment, difference between rent and mortgage payments*, property tax, insurance, and maintenance* in the S&P 500 your portfolio would be worth $164,954. There is negligible tax benefit because the amount of interest you pay barely exceeds the personal exemption in the first year.

If you sold your home on May 1 for $600,000, you would pocket $276,000.

However, I am curious how you received a conventional conforming 15 year fixed rate mortgage in 1999 that is a full 168 basis points better than lowest average rate reported by Freddie Mac in 1999 (http://www.freddiemac.com/pmms/pmms30.htm). In fact, that is the best rate in any month since 1991, aside from Mach 2004 or June 2003. Did you refinance or pay points?

I looked through about a dozen listings in the 400K price range (380 to 420)... not a single one had condo fees over $260 a month (and went as low as $97 a month) I have also never heard (and am not sure if it is even legal) for the condo fees to not include the master insurance.
Taxes ranged from $2040 to $4086

Also, my condo fees are $335 a month including heat/water/gas/master insurance
Taxes are 3,086.
The exact same unit two floor below me recently sold for $505,000

Charles, you are taking my comments too seriously. As I said very clearly, the lower values do not invalidate your argument. Renting is often cheaper than buying.

Assessed value is almost never full purchase price. Again, speaking from personal experience, a $440,000 condo might have an assessed value of $336,000, so at the city's rate of $10 per $1,000, around $3,600 per year. Yes, reduce this by the $1,525 residential exemption.

More information for others reading this: your typical condo fee will include master insurance (on the building, common areas), and payments for public water and sewer. Also, usually some sort of fee for common area vacuuming and upkeep. And, if you're lucky, a little extra to put aside for future capital expenses. In older buildings, you might have a common heat and hot water source; if so, your condo fee may include the charges. Electricity is almost always separate, regardless of whether or not you have electric heat.

I find it interesting that The Economist assumes the price-rent ratio will normalize only through housing prices deflating to previous levels. This is a very broad statement that will most certainly be wrong for some markets where employment and/or wage growth will allow for rents to rise, which will also return the price-rent ratio to its historic levels.

My point is that Real Estate remains overpriced, and will continue to fall. I stated that my numbers were back of the envelope and not based on a specific property. Jason and Tim, you are only putting out part of the numbers, I hope you will come back and put in the rest of the ownership numbers?

Owning costs more than renting. Its a simple fact. Refer to the graph at the begining, rather than making meaningless quibbles.

And my point was that prices will continue to drop until that premium makes more sense.

As the latest news from the NAR shows today, with prices showing another drop. And Toll brothers reported another bunch of bad news, with ugly predictions about the future.

Of course that doesn't apply to Boston, we're special here. Just as when I told people prices would drop back in 2005 no one agreed, because "real estate is special, it never goes down"

Frankly, as a real estate developer with nothing to do I'd love to believe prices will rise like they just did. I made great money, and I'd love to do it again. I just don't see any basis for thinking so.

WB - I think we're somewhat in agreement then. The properties I am talking about are the mid size to larger professionally managed buildings with some extra amenities such as garage parking, pool, elevator, doorman, w/d, etc. I have found the rents in these buildings to be very high and they do increase. A couple examples that I recently visited myself are Brook house and Dexter park in brookline where the smallest 1br starts at nearly 2k/mo for a 12mo lease. Larger units or shorter leases are more, and they are full. I don't see any trends this will change as buildings like these seem to be less common in desirable areas. However I do agree that smaller or less amenity buildings and private owners have enough competition in the market to prevent them from any large increases at all. I do think that Boston metro is unique compared to other places in the country due to the very large supply of students causing rental demand, combined with an already dense area.

Buying has always cost a premium over renting and always will. Granted, that premium may be out of wack on some properties, but not all. Yes, you have to look at the total cost of owning including mortgage rate, property tax, and hoa of applicable, and also factor in the residential exemption and tax deduction against your income as well. Believe it or not, with 20% down you can find places that will cost you the same or close as a comparable monthly rental expense.

There is no right or wrong answer and everyone is in a different situation so it's nonsense to make blanket assumptions that it's a great time or bad time for everyone to buy. It really depends on the individual's finances, timeframe, and what type of property/are they are looking at. Frankly, in Boston's nicer areas the value is still there. There's a limited amount of space so not everyone is going to be able to live there..city life.

So back to the point, why is there a premium? It's not all capital gain speculation, there are many reasons:
Security, stability of have an established presence.
Nicer living conditions, building, finishes, appliances, etc.
May have better neighbors depending on your budget and luck..but likely.
Control over your budget and no future rent increases. Obviously your time frame is important here.
Ability to renovate or decorate as you please.
Ability to have other people live there or rent it our (many rentals frown upon a relative moving in for example).
Never having to worry about a landlord who wants to sell, raise rents, do a renovation without your consideration, or other shenanigans. I had a particularly bad experience in this area in a rental.

It's easy to live month to month and before you know it years go by in a rental. If you can make the numbers work you're better off owning something even if you're still waiting for your dream home. I'm not an agent, I'm speaking from experience and simply giving my opinion.

20% Down is the problem. First Time Homebuyers dont have it. The last 10 years they didnt need to have it either. They just got Piggyback mortgages to beat PMI too. Those days are over. You will be fortunate to find 20 somethings with 5-10% DP for a home. 3% to 5%is the new norm and those people have to pay PMI which adds another $150/mo which reduces what they can buy by $25,000. The FTHB homes for sale are going to go lower and lower and then what happens to the 450k or 500k homes they go down because the folks who own the FTHB homes now are losing a big chunk of their equity so they will have less to put down on the next step up house...

It all starts and ends with the ability for FTHB's to get into that first house. And speaking as a prospective FTHB, my friends and I are not going to become House Poor like our older siblings who complain that they can't go on a ski trip or a vacation to florida or even go out to a Sox game cause its gonna run them $150... We are gonna wait till we can afford a starter house for lets say $275k if you make $110,000. We can swing those payments.

There are in fact many people with 20% down if not far more than 20% - it's not that hard to save up that amount if your prudent. I was one of them, along with other friends..all late 20s early 30s. If you make 110k you can surely afford more than a 275k home. Whether you want to or not is a personal preference but I'm just saying..you don't need to make 110k to afford that price level and that's really not a good example. Now I do agree that too many people with no money were buying homes which is why problems are occurring, but this isn't the whole market and is unlikely to occur across the board.

Dave - that makes sense. Especially after reading more of the posts here, I think I've been talking apples to other people's visions of oranges when it comes to rentals. Renting in a managed apartment building is only one type of rental, and it's a whole different game to renting an apartment in a house - which is, IMHO, truly the best deal in town. Why pay $2000 for a 1BR in a multi-unit building when for $1400 you can get half a house with a yard?

Alex - By industry standards we could afford mid to high 300's but as you said we are choosing to spend less. I disagree with you however in your assumption that it is not that hard to save up 20% on lets say a $350k home. To amass $70,000 in cash by the time you are say 29 is difficult if you are doing what you should be doing in terms of saving for retirement (lets say 8k after tax in a roth ira and another 15k in 401k plans) add in the high likelyhood of todays 20 somethings having large amounst of student loan debt (25k-50k) it can prove to be far more difficult to save $70k in liquid cash by the time your in the late 20's. My other point was that the reason hosuing went so crazy was that Millions of people who had no business buying homes were buying this decade without having 20% down and often times not having a 30 yr fixed mortgage.

Fortune Magazine had a better study of the same concept last November http://money.cnn.com/magazines/fortune/price_rent_ratios/ it shows the historic ratio , has a break down per city and and estimate of whether the correction will come from lower home prices or higher rents per city.

I also find the data in the economist odd, using Binyamin's example, I don't know of any town around where a condo or SF costing $1,250 a month in rent, would cost $429,000 to buy. It would be much lower. I have heard economists say the proper ratio is anywhere for 10x annual rent to 15x annual rent. 20x annual rent seems pretty high as a long term norm.

To add more confusion this ratio is heavily impacted by mortgage rates. The ratio from 1980 when mortgage rates were 16% should be loweer than the ratio in 2004

John Ellis - I'm living in that town, and it's not the only one in the state. Condo conversions of multifamilies next to rental multifamilies make it easy to compare, particularly since so many multifamily houses appear in clusters (two or more houses with the same footprint and floorplan in a neighborhood). Sure, the conversion may have some "improvements", but are those granite countertops really worth $500k if the house next door rents for $1300?

All of a sudden everyone is an arm chair economist... The fact of the matter is not everyone can profit all the time. The post about investing the downpayment in the S&P 500 vs owning a home. When you invest you are investing your own hard money. When you buy a house you are borrowing money. Go to the local bank tell them I want a personal loan for $400K I am going to invest it in the market and get a 10 % return every year year after year for as long as I want to be in the market. The banker may call your employer to see if you took a drug test. When you flood the market with cheap money and exotic loans people can qualify for a bigger loan. Sign me up. Housing should not be speculated on like the market. I bought yahoo stock for $9.00 a share way back sold it when it was at $60 laughing the whole time how does a search engine that manufactures nothing warrant a price like this. .. What justification is there that my 2 family house that my mother sold in 2001 for $145k is now worth $350k . Is it thie simple fact that you were born before 1975 that allows the value of your home to triple? Did you put $300k into your 150K house to warrant $450K Quick money is very addictive. I stick with the 28 % rule if it costs more than 28% of my gross monthly income why? If I want to pay the premium over that fine. Don't try to convince me my $450K house 20 years from now will be worth 1.8 M dollars that is foolish. Now that the money faucet has been shut off you will see the prices come down. I have a friend in the car business and one who builds houses. I asked how come a car depreciates 20 % as soon as you buy it but a house is expected to appreciate 5 -10 % a year.

Is this ratio for the Boston metro or nationwide? For my personal residence in Metrowest, it was being rented for $1800/mo up until a few weeks before my closing. I paid $360k for it, so the ratio for my house is 1800 x 12 / 360000 = 6%. That's a pretty high (good) ratio, right?

@Matt: I just bought my starter 3/1 ranch for $360k, not $370k! =p

@ Mike: There is a Very Good chance that your home will lose 10 or 15% from here. But if you plan on living there for 10 years you will do fine. Congrats. I am just going to wait about a year longer untill I buy my 3/1 ranch hopefully for $300k.